The Conforming Loan Limit – Helping More Buyers Achieve Homeownership

  • Home
  • The Conforming Loan Limit – Helping More Buyers Achieve Homeownership

The conforming loan limit is an important component of the US housing finance system. This limit, set each year by the Federal Housing Finance Agency (FHFA), determines the maximum size of a mortgage that can be purchased by government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac. Loans above this limit are considered non-conforming or jumbo loans.

You may get a loan from your local mortgage lender, but more often than not, they are selling that very same loan on the bond market to these big GSEs, and in order to do so the loans need to “conform” to the GSE guidelines.

For 2024, the conforming loan limit has been increased to $766,550 from 2023’s limit of $726,200, representing a nearly 6% increase over 2022.

However, in high cost areas such as parts of California, Hawaii, New York City…the conforming loan limit is over $2,000,000 for a 4 family-unit property!

What is the Purpose of the Conforming Loan Limit?

The conforming loan limit serves multiple purposes. First, it allows low-and moderate-income borrowers to access affordable 30-year fixed-rate financing for homes in higher cost areas.

By buying conforming loans, Fannie Mae and Freddie Mac provide ample capital for mortgage lending nationwide while limiting risk exposure on each individual loan. This promotes liquidity and stability in the housing market.

The limit also aims to cover homebuyers in typically expensive housing markets. Regional adjustments by the FHFA account for differing home values so more buyers can utilize conforming loans.

illustration of black folks in front of a home

Loan Limits Differ by Type of Property (1-4 units)

Any property that has less than 4 units is considered to be residential real estate. 5 units or above? That’s considered commercial property. Therefore, you can buy a duplex (2 units), triplex (3 units) or 4-plex (4 units) and it will still be considered residential real estate.

Many people are interested in house hacking and are buying a multifamily (1-4 units) in hopes of living in one unit and renting out the other units in order to generate rental income. This is an excellent strategy and conforming loan limits can help.

The more units a property has, the higher the conforming loan limit. In other words, the bank will let you borrow more money based on the size of the property. For example, in New York city, the 2024 loan limits are as follows for single and multifamily properties.

  • Single Family (1 unit) – $1,149,825
  • Duplex 2 units) – $1,472,250
  • Triplex (3 units)- $1,779,525
  • Quad (four units) – $2,211,600

The mortgage lender will take into account 75% of the potential rental income the additional unit(s) will provide in order to help you qualify for the higher loan limits.

How it Adjusts Annually Based on Home Values

Each year, the Housing and Economic Recovery Act requires the FHFA to assess average home values and set appropriate conforming limits. From year to year, the baseline limit generally rises in line with the average increase for single-family homes. Fannie Mae and Freddie Mac provide detailed analytics to inform appropriate regional changes.

illustration of borrowing more money

Higher limits for 2024 reflect the ongoing rise in prices fueled by limited housing inventory, low mortgage rates, and intense buyer competition. They allow higher-priced homes to be financed at competitive rates through conforming loans. This aids affordability while encouraging further home construction and sales activity.

Conforming Limits Apply to Different Mortgages

The conforming loan limit determines eligibility based on the original mortgage amount, even if the current balance is lower. It applies to most common mortgage types, including:

  • 30-year and 15-year fixed-rate loans
  • Adjustable-rate mortgages (ARMs)
  • Fixed-rate and ARM FHA loans
  • VA mortgages and USDA loans

If the property you’re interested in will require you to borrow more than the conforming loan limit, you will need to take out a jumbo loan. These loans carry higher down payment requirements and stringent credit scores along with excellent debt to income ratios.

Luxury loan products that allow jumbo financing may carry the conforming limit for part of the amount while providing non-QM access above that threshold. Investors and vacation home buyers may use this option to tap higher lending amounts.

black man sitting on money

Increasing Limits Support Rising Prices

Economists point to a circular effect between conforming loan limits and swelling home values. As prices rise rapidly, FHFA increases limits to cover more expensive markets. This immediately opens access to lower interest rates, fueling buyer demand. Fierce competition then drives prices up further until limits adjust again.

Higher limits certainly facilitate transactions that couldn’t occur otherwise due to regulation. However, many argue this additional purchasing power primarily translates into inflated values rather than increased ownership. Further analysis is needed, but the dynamic does demonstrate the outsized influence of conforming loans on the overall housing market.

In other words, by allowing people to borrow more money to cover the cost of housing, prices naturally increase. Think about it. If you had to cover, say an extra 20K out of pocket, you may think twice. But if you can finance this 20K cost over the course of 30 years, then you’ll barely notice it on your monthly mortgage payment.

In other words, home prices are basically programmed to increase. You can either be upset about it, or do whatever you can to become a homeowner. As they say, if you can’t beat them, join them.